A long-running dispute over the closure of Glasgow’s iconic Rogano restaurant, forced shut by significant water damage in 2020, has made its way through the courts in Forthwell Ltd v Pontegadea UK Ltd. At its heart lies a highly complex area of law, illustrating just how intricate commercial property disputes can become when unforeseen events collide with contractual obligations.
Among other things, the case will settle, or at least provide further higher authority for, the question of transferred loss in Scotland. Where two parties contract, A and B, and one party breaches that contract in a way which causes loss to a third party, C, can the innocent party in the contract raise legal proceedings to recover the loss suffered by C? Following the general principles of the law in Scotland, (i) C would have no recourse against the contract-breaker themselves, not being a party to the contract (i.e. “privity of contract”), and (ii) the innocent party would be limited to claiming damages for losses which they themselves have actually suffered.
Scots law has created mechanisms for third parties to recover losses in certain cases, under Collateral Warranties (distinct contracts giving the third party contractual rights) and under the jus quaesitium tertio, now the Contract (Third Party Rights) (Scotland) Act 2017 (where parties to a contract intended to give rights to third parties in that contract). However, Scots law has appeared, in one form or another, to recognise that in some cases where third-party rights do not apply, A should be entitled to recover C’s loss, and a confusing set of cases from both Scotland and England have muddied the waters somewhat as to what should be the position in respect of these losses and their recoverability.
In Forthwell Ltd v Pontegadea UK Ltd, the restaurant premises were owned by Pontegadea. Forthwell took a lease over the premises in August 2013. Immediately, Forthwell’s wholly owned subsidiary Lynnet Leisure (Rogano) Ltd entered into a licence with Forthwell and traded from the premises as the Rogano. Between 9 December 2020 and 10 January 2021, the property experienced three separate incidents of water ingress and water damage. Lynnet ceased trading from the premises while repair works were to be carried out. Repairs are the liability of Pontegadea under their lease with Forthwell.
In their action, Forthwell sought (i) an order that Pontegadea are to carry out the repair works to the premises, (ii) which failing, payment of £789,000 for damages being the cost of carrying out the repair works, (iii) damages of £178,696.94 for Lynnet’s losses from not being able to trade, and (iv) further damages of £934,056.13 as estimated future losses of Lynnet for not being able to trade while the repairs are carried out. Lynnet had no contractual relationship with Pontegadea, and the losses suffered by Lynnet were not suffered by Forthwell.
Importantly, under the terms of the licence, Lynnet were excluded from recovering any of their losses from Forthwell where they were a result of the premises not being fit for purpose. Forthwell could not therefore claim that they were liable for Lynnet’s losses and these should be passed on to Pontegadea. Under the general principles of contractual law and damages, Lynnet’s losses fall into a black hole, and they are unable to recover.
The Outer House of the Court of Session held that there was a relevant claim in terms of Forthwell’s claim for Lynnet’s losses. This follows a difficult history of development of cases concerning such issues, stemming back to Dunlop v Lambert ((1839) Macl & Rob 663). In 1839, the court held that where parties had contracted for the carriage of goods by sea, and those goods were lost, and Dunlop was liable to an ultimate buyer of those goods who was not a party to the carriage contract, Dunlop could recover the losses suffered by the ultimate buyer.
Fast forward to the case of The Albazero ([1977] AC 774), the court held that where goods are consigned to carriage by sea and those goods are lost, the consigner could recover damages from the shipowner even if he did not own the goods, but he would then be under a duty to account to the owner for those damages recovered.
The court in The Albazero provided rationale for its decision by saying, “The only way to rationalise the decision in Dunlop v Lambert is to treat the party to the contract as having entered into the contract for the benefit of all parties who will have an interest in the goods where the transfer of the property [to the third party] was in contemplation of the parties”.
The English case of Alfred McAlpine Construction Ltd v Panatown Ltd ([2001] 1 AC 518) took things a step further. The court allowed a party to sue for the losses of a third party and stated that a party could sue for all losses regardless of whether they were their loss, with a duty to account to the party which actually suffered the loss. Lord Clyde stated “the solution is required where the law will not tolerate a loss caused by a breach of contract to go uncompensated through an absence of privity between the party suffering the loss and the party causing it”.
Scotland followed suit, with the Outer House of the Court of Session finding in the case of McLaren, Murdoch and Hamilton v The Abercromby Motor Group (2003 SCLR 323) that a party suing for the loss suffered by a third party did so “on behalf of” that third party, and there was a duty to account for any damages recovered. The Court stated that the right of a party to recover the losses of a third party was a right “deemed to exist in law” rather than with reference to whether the parties intended their contract to benefit a third party.
While this authority would suggest that the Outer House in Forthwell Ltd v Pontegadea UK Ltd was correct that there was at least a case to answer in respect of Forthwell being able to recover Lynnet’s losses, on appeal, the Inner House (including the preceding and current Lords President) fell back on the general principles of privity of contract, and what damages are available to be recovered by a party.
The Inner House rejected the position that there was a deemed right to recover a third party’s losses, and that any suggestion of a right with a duty to account had no basis in law. A party looking to recover damages can only recover those damages which would put that party back into the position that he would have been in had the breach not occurred. That would not include the losses of the third party (particularly noting that Forthwell had no liability to Lynnet under their licence).
The court also refuted the “Albazero exception”, stating that it was an erroneous general principle, and that the interpretation of the decision in Lambert v Dunlop was also erroneous. Interestingly, Lord Malcolm provided a dissenting opinion, preferring the approach that where a contract breaker had caused loss, they should be liable for that loss regardless of who has suffered, perhaps looking back on the possibility that losses should not fall into any such “black hole”.
It would be an understatement to say that the law in this area is complex, and has struggled with inconsistent decisions, not least now from the Inner House. Keen eyes will be watching to see if the Supreme Court provides some much-needed clarity on the issue.
